S. Africa Central Bank Holds Rate, Says Next Move May Be Up

South Africa’s central bank held its benchmark interest rate for a fourth straight meeting, with its projection model showing it could tighten at the monetary policy committee’s next deliberation in May.

The MPC kept the repurchase rate at 3.5%, Governor Lesetja Kganyago said Thursday in an online briefing. That’s the lowest level since it was introduced in 1998.

The decision by the five members of the panel was unanimous, signaling a shift in sentiment after two members voted for cuts at the last three meetings. However, economists including Razia Khan, chief economist for Africa and the Middle East at Standard Chartered Bank, said it would be a mistake to read the committee’s unanimity as a more hawkish stance because “little room for further easing doesn’t mean imminent tightening.”

S. Africa Central Bank Holds Rate, Says Next Move May Be Up

The implied policy rate path of the central bank’s quarterly projection model still indicates two increases of 25 basis points this year, but those are now seen in the second and fourth quarters instead of the second and the third. The shift is due to somewhat lower inflation expectations for 2022, Kganyago said. The MPC’s May 20 meeting is the only one scheduled for the second quarter.

What Bloomberg Economics Says

“We expect rates to remain on hold, with the two hikes signaled by the quarterly projection model being pushed out to the back-end of the year, at least.”

--Boingotlo Gasealahwe, Africa economist

-Click to read the full REACT

“The repo rate projection from the quarterly projection model remains a broad policy guide, changing from meeting to meeting in response to new data and risks,” the governor said.

Economists in Bloomberg’s monthly survey see the rate staying unchanged until the end of the year. However, traders are more hawkish. While forward-rate agreements dropped as they pared some of their rate-increase bets after the statement, contracts starting in eight months still price in three 25 basis-point hikes by the end of the year.

SURVEY REPORT: South Africa Economic Forecasts in March 2021

Inflation is now projected to average 4.3% this year, compared with the MPC’s January estimate of 4%. That’s after it accounted for increases in global oil prices and a larger-than-expected domestic electricity tariff increase. The panel prefers to anchor price growth close to the 4.5% midpoint of the bank’s target range and sees it averaging 4.4% next year and 4.5% in 2023.

The central bank raised its economic growth forecast for 2021 to 3.8% from 3.6% but that’s largely in line with an improvement in prospects for the global economy. Domestically, the risk of a third wave of coronavirus infections that would lead to a reintroduction of stricter lockdown measures and ongoing electricity supply constraints could weigh on output.

While its forecasting model shows real interest rates will turn negative this year, it would take a significant uptick in economic growth and narrowing of the output gap to make the MPC “less tolerant” of a repurchase rate that’s below inflation, said Deputy Governor Rashad Cassim.

©2021 Bloomberg L.P.

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